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When you’re looking at saving and planning for retirement, it’s important to know how much you can expect to be spending. The latest retirement standard figures and other data sources can give you an idea of the cost of retirement, but what else do you need to take into account to ensure your financial wellbeing?

Running the numbers – the retirement standard

Since June 2006, the Association of Superannuation Funds of Australia (ASFA) have been monitoring the living costs associated with retirement. Every quarter they research and publish the average annual budget singles and couples aged around 65 can expect to spend when living a modest or comfortable lifestyle in retirement. This is known as the “retirement standard” and for some time it’s been a popular yardstick for what it costs to live as a retired person in Australia.

Your definition of comfortable

For a modest way of life, think essential living expenses, taking holidays in Australia only and limited spending on upgrades to cars, appliances and electronic items. Things like international travel, a new car from time to time and eating out on a regular basis are definitely the trappings of the “comfortable” lifestyle category.

Of course your idea of what a comfortable lifestyle looks like – and the money it takes to live it – could be quite different from the retirement standard definition and estimates. The amount you earn and spend in the lead up to retirement is just one of the things that can influence your budget and spending patterns after you’ve left work. How and where you plan to spend your retirement is also going to affect how much income you’ll need.

The big ticket items – health and energy

According to a recent media release from the ASFA, budgets for singles and couples living comfortably have risen 23% and 26% respectively in the decade since the first retirement standard figures were published. The increases for a modest lifestyle are considerably higher, at 33% for a single person and 36% for a couple. As the ASFA have identified the rising costs of power, food, rates and health care as the main culprits for these changes, it’s not surprising that the impact is greater for those living modestly. In any household budget, these four items would be considered essentials rather than luxuries.

The modest living retirement standard figures are running well ahead of the Consumer Price Index (CPI) increase for the same period which was 28.6%. But while it might seem retired people living a simple life are worse off than they were 10 years ago, changes in the aged pension tell a different story. In real terms, the aged pension rose by 70% for a single person and 54% for couples during this time, making it possible for retirees to cover their living costs, in spite of major price hikes for essentials.

Relying on the aged pension?

This is an important reminder of the significance of the Age Pension in supplementing income from your super. In fact, the latest quarterly Milliman Retirement Expectations and Spending report published in June 2017, claims the median annual expenditure of a couple aged 65-69 is just $34,858, which is only marginally higher than today’s full aged pension allowance for couples of $34,819 per year. But as January 2017 changes in assets and income tests for the age pension demonstrate, it’s difficult to have certainty about your future entitlement to government benefits in retirement.

Taking home and health for granted

Something else to bear in mind when calculating your own personal retirement budget is whether you own your own home and how you’re doing health wise. Retirement standard figures are based on two important assumptions – you live in a home you own outright and you’re in good health. So if you’re likely to be renting for the rest of your life or spending on a mortgage or medical bills in the early years of retirement, you’ll need to factor this into your budget.

Advice could make a difference

Even with the help of carefully compiled estimates, surveys and reports from the ASFA and Milliman, figuring out how much you should be saving for retirement and how best to invest it for a healthy return can be a challenge. Seeking advice from a financial planner can help you understand the superannuation balance you’re going to need to retire in comfort and come up with a strategy for working towards that target.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Footnotes:
[1] ASFA Media Release Retirement cost increases driven by power prices, health care, food and rates 29 May 2017 “Between June 2006 and March 2017, the RS budget at the modest level for a single person increased by 33 per cent, while the single comfortable budget rose by 23 per cent. The budget for a couple at the modest level increased by 36 per cent and at the comfortable level by around 26 per cent.” https://www.superannuation.asn.au/media/media-releases/2017/media-release-29-may-2017
[2] ASFA Media Release Retirement cost increases driven by power prices, health care, food and rates 29 May 2017 “Over the period, electricity costs increased by 124 per cent, health costs by 60 per cent, property rates and charges by 83 per cent and food costs by 24 per cent.” https://www.superannuation.asn.au/media/media-releases/2017/media-release-29-may-2017
[3] ASFA Media Release Retirement cost increases driven by power prices, health care, food and rates 29 May 2017 “ASFA CEO Dr Martin Fahy said the figures compared to an overall 28.6 per cent increase in the Consumer Price Index (CPI).” https://www.superannuation.asn.au/media/media-releases/2017/media-release-29-may-2017
[4] ASFA Media Release Retirement cost increases driven by power prices, health care, food and rates 29 May 2017 “Over the more than 10 year period, the maximum Age Pension increased in real terms, by 70 per cent for a single person and 54 per cent for a couple.”https://www.superannuation.asn.au/media/media-releases/2017/media-release-29-may-2017
[5] Milliman Retirement Expectations and Spending report Q2, 2017, 30 June 2017, page 8 “the Age Pension is expected to fund a large portion of household spend for many couples. The observed median annual spend for couples aged 65-69 is $34,858 which is only slightly higher than the full Age Pension.”

The term self-managed superannuation fund – otherwise known as an SMSF – basically refers to do-it-yourself super. Having an SMSF means simply having control of how your superannuation is being invested, and it has recently become a popular method of saving for retirement.

If you choose to go down this path, it’s essential that you are aware of the administrative and compliance requirements of SMSFs. The information below should answer many of the questions and obligations specific to managing your own SMSF.

Before you consider leaving your current superannuation fund to establish an SMSF, you should discuss your options in detail with a financial planner.

An SMSF is a trust where funds or assets are held and managed on behalf of a maximum of four individuals, to provide future retirement benefits. Subject to certain exceptions, all members of an SMSF must be trustees of the fund or directors of the fund’s corporate trustee.

What are the benefits?

The main rationale for establishing your own SMSF is the increased level of control you have, as well as the investment choice and flexibility. You become the trustee of your fund and therefore make decisions on your fund’s investment strategy and the type of assets that are held within your fund.

Your SMSF can also invest in almost anything, including investments not usually available in a public super fund (please note, however, that these investments are subject to certain limitations and legal restrictions). This will allow your fund’s investments to be customised to suit the precise requirements of members, before and after retirement.

Furthermore, similar to all complying super funds, an SMSF is taxed at a concessional rate. The top tax rate for investment earnings from your SMSF is 15 per cent. This tax concession, however, is only available for complying funds – which are SMSFs that fulfil all the rules set out by the ATO, the Superannuation Industry (Supervision) (SIS) Act 1993 and the SIS Regulations.

Things to consider

Who are the governing bodies?
The Australian Taxation Office (ATO) is responsible for overseeing the regulation of SMSFs. While the ATO’s regulatory approach to SMSFs has been focused mainly on education and information, it is fast becoming more aggressive in its stance on fund compliance.

Obligations and rules
As an SMSF investor, you need to consider your fund’s investment philosophy – like any other super investment, you will need to establish what the acceptable rate of return is and how much risk you are willing to take with your retirement savings. These are areas where professional management can be a good idea.

As an SMSF trustee, you are required to regularly review the investment strategy of your fund and consider insurance for the members of your fund.

Many investors who open an SMSF employ the services of specialist administrators to take on the difficult compliance activities on behalf of their fund. This is beneficial as they can still enjoy the investment control and flexibility without the added burden of administration.

Your fund’s compliance with superannuation law is vital and you are legally accountable for ensuring your fund complies with all the rules – even if you pay for professional management.

The main components of compliance for an SMSF relate to:

how and when an SMSF is permitted to borrow in-house asset rules

acquisition of assets from related parties, and

conducting all dealings at arm’s length.

Sole purpose test
The foundation of the SMSF regulatory system is the ‘sole purpose test’ – the sole purpose of your fund should be to provide retirement benefits to fund members.

Separation of assets
The assets of the fund must be separate to those of a business where one or more of the trustees are involved. For instance, if the trustee is declared bankrupt or if their business is placed in receivership and the assets are held in the name of that trustee, rather than being clearly held as a part of the fund, the fund risks the loss of the asset. The failure to separate assets is a clear contravention of SIS.

Investments
To assist in making sure the assets in an SMSF are available to produce retirement funds, SMSFs are limited in the investments they can make. However, one of the concessions that the SMSFs can enjoy, is the ability to invest up to 100 per cent of the funds’ assets in a business real property. The disadvantage of this, however, is the lack of investment diversification and liquidity.

More restrictive rules apply to investments in personal use assets and collectables, that are in addition to the sole purpose test. Under the latter members cannot enjoy the benefit from the investment prior to reaching their retirement age. This means that unless strict conditions are met and must be removed from the fund – like in the case of leasing the art to a member or related party, in line with the ‘in-house asset’ and ‘arm’s-length’ rules – the art cannot be displayed in the trustee’s home or office.

The in-house asset rules suggest that the particular investment can make up a maximum of 5 per cent of the fund’s entire assets and the arm’s-length requirement means that it should be leased to the related party at commercial rates.

Trustee responsibilities
It is of the utmost importance to meet trustee responsibilities, especially in regard to the SMSF holding its own bank account (and not personal accounts), and ensuring this account isn’t overdrawn.

SMSFs that comply with all regulations are demonstrating to the ATO that they are appropriately managed. It is also important to note that the costs associated with the management of the SMSF, including ensuring compliance with all regulations, generally means that fund members collectively need between $200,000 and $250,000 to make the exercise of establishing an SMSF worthwhile. This does not include the initial set up costs involved.

To discuss your SMSF options, contact our office to speak to one of our SMSF Specialists.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Happy New Financial Year!

The new financial year is the perfect time to take the leap and bridge the gap between you and your finances.

We know that every individual and family is different. That is why we custom tailor our Financial Planning Services to your stage in life and your destination of what it is that you would like to achieve. Put simply, we produce for you a tailored report that illustrates what your future financial position might look like based on your current financial circumstances, life goals and needs.

Using information such as:

– your likely retirement age

– household income and expenditure

– current assets and liabilities

– superannuation balance

We are able to map out a LIFEPLAN and visually demonstrate how much you can afford to spend or invest today in order to provide for a better financial future.

This will give you a clear guide of how much money you will need in retirement, an estimate of how much money you’ll have in retirement if you stick on your current path, and a roadmap of how to ensure you get to your chosen destination and have the retirement that you deserve.

Send us a message via Facebook, email us or give us a call to arrange your no-obligation phone consultation with James to see if LifePlan can help you.

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